Revealed: The growth, deficit assumptions behind the next budget

Union Finance Minister Nirmala Sitharaman addresses the media during a press conference at the National Media Centre in New Delhi.  (ANI/Rahul Singh)
Union Finance Minister Nirmala Sitharaman addresses the media during a press conference at the National Media Centre in New Delhi. (ANI/Rahul Singh)


  • The nominal growth rate assumption always doesn't pan out, but are necessary to plan out spending and budgetary allocation

The Union budget on 1 February may assume a nominal economic growth rate of about 11.5% and a fiscal deficit target of about 5.3%, a person with knowledge of discussions in the government said, as the Centre aims to leverage the budget to meet its fiscal consolidation goal over the next two years.

The 11.5% nominal GDP (gross domestic product) growth rate projection for FY25, which is expected to form the basis for next budget’s calculations, entails a real GDP growth rate of 7% and a GDP deflator of about 4.5%. An 11.5% growth rate would take the nominal GDP for FY25 to 330 trillion. In FY24, nominal GDP size was 296.6 trillion, as per the first advance estimate released in December.

An email sent to a finance ministry spokesperson on Friday seeking comment was unanswered till press time.

Nominal GDP refers to the total value of all goods and services produced in a fiscal year, whereas real GDP gives the same value by adjusting for inflation (price rise), with the help of the GDP deflator.

The likely budget assumption of 11.5% nominal GDP growth in FY25 is the most ambitious projection since the 14.4% expansion projected in the FY22 budget for the year, in which the economy rebounded from a pandemic-induced contraction.

Such growth assumptions do not always pan out accurately, but are necessary in the context of planning fiscal policy and budgetary allocations. In FY24, nominal GDP growth of 10.5% was assumed in the 2023 budget, but the first advance estimate released in December showed a nominal GDP growth rate of 8.9%. That has happened largely because wholesale price index (WPI)-based inflation remained in the negative zone in April-December.

In comparison, India’s nominal GDP expanded 16.1% in FY23, against that year’s budgetary assumption of 11.1%.

Meanwhile, finance minister Nirmala Sitharaman’s budget speech is expected to send out a clear signal about the government’s commitment to reduce the fiscal deficit to 4.5% of GDP by FY26. That would require a reduction of 1.4 percentage points in two years, from the 5.9% fiscal deficit targeted for FY24.

“If we have to get to the goal of reducing fiscal deficit to 4.5% of GDP, it is difficult to reduce it by more than 70 basis points in a year, keeping in mind the (expected) growth of the denominator (nominal GDP)," said the person cited above, who spoke on condition of anonymity. “Even that is difficult. If we are trying to get there, the FY25 budget projection for fiscal deficit may be 5.3% or around that. Otherwise, you can’t reach 4.5% in two years."

Experts said that a fiscal deficit target of 5.3% (or 17.1 trillion) for FY25 may not be out of reach. “Real GDP growth rate can be in the range of 6.5-7% in FY25 and implicit price deflator-based inflation can be in the range of 3.5-4%," said D.K. Srivastava, chief policy advisor at EY India, adding that an 11.5% nominal GDP growth rate is within the range of feasibility.

A second person, who also spoke on condition of anonymity, said fiscal consolidation (managing debt and deficits) is a priority for the government. India’s fiscal deficit has been narrowing after skyrocketing in FY21 because of covid-related expenditure. From 9.2% in FY21, it shrank to 6.4% in FY23.

Fiscal deficit is the gap between what the government spends and earns in a year, which can be reduced by increasing tax collections or by borrowing, or by other means.

In FY25, the first person cited above said tax collection is likely to grow at a slightly faster pace than the projected nominal GDP growth rate of 11.5%, suggesting that further improvements are likely in the administrative efficiency in tax collection. The Centre’s gross tax revenue has grown at 14.7% in the April-November period, compared to 12.7% at the end of FY23, as per data available from the Controller General of Accounts (CGA).

“There has to be an assurance about fiscal consolidation (in the budget) because questions have unnecessarily been asked," said the person, referring to the International Monetary Fund’s view made public in December that if shocks materialize, the debt of central and state governments together would exceed 100% of GDP in the medium term.

The finance ministry subsequently clarified that IMF’s observation was an extreme possibility, a worst case scenario of adverse shocks, and that general government debt will decline substantially in the medium to long term.

Besides the discipline in managing budget, Sitharaman is also expected to speak about the performance of the Indian economy, which is seen as a bright spot amid a challenging external situation, the journey towards becoming a developed nation and the reduction achieved in multidimensional poverty in recent years.

NITI Aayog had on 15 January said that close to 25 crore people have escaped ‘multidimensional’ poverty in last nine years, citing an index that measures the impact of social transfers and welfare measures in the area of health, education and standard of living.

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